Nobody Knows
How will the IRS tax prediction markets profits and losses? As Nate Bargatze (as George Washington) would say: Nobody knows.
The Bulletin Board
THE LEDE: How will the IRS treat prediction market winnings?
NEWS: Prediction market hearing had a lot of bark; don’t expect any bites.
QUICK HITTER: NCLGS announces new leadership.
ALTRUDA ANALYZES: Pennsylvania online casino revenue, June 2026.
AROUND the WATERCOOLER: What is the facial recognition bill really about?
STRAY THOUGHTS: Good news for coffee drinkers.
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The Lede: How Will the IRS Treat Prediction Market Wins/Losses?
Last week, CNBC highlighted the uncertainty around the tax category prediction market profits and losses fall into. As CNBC noted, more than halfway through 2026, the IRS has yet to issue any guidance on the tax treatment of event contracts.
As Straight to the Point has noted, what the CFTC says prediction markets are (a financial product and not gambling) and how the IRS treats them for tax purposes doesn’t need to align. As I previously wrote, “the IRS is not bound to the CFTC’s definition and can classify prediction markets as gambling income.”
While not a federal position, DraftKings and FanDuel positioned their daily fantasy sports contests as games of skill, not gambling, and plenty of courts and states accepted (or at least did not block) that framing, licensing and regulating DFS not as gambling, but as a skill-based contest. Still, the IRS taxed DFS wins and losses as gambling income.
Another example is cryptocurrencies, which are treated as commodities by the CFTC, and some as securities by the SEC. That said, the IRS treats virtually all cryptocurrencies, stablecoins, and NFTs as property (not currency).
Put simply, regulators classify activities or assets based on their rules for oversight, legality, and market integrity. On the other hand, the IRS makes an independent determination based on tax law definitions.
With that out of the way, here’s the gist of how prediction markets’ profit/losses could (stress, could) be taxed:
As Gambling: Profits would be taxed as ordinary income (up to 37%). Losses are deductible only against winnings — excess losses cannot be carried forward — with the newly implemented 90% cap in 2026.
As Short-Term Capital Gains: Like gambling income, short-term gains (held for less than a year) would be taxed up to 37%. One big difference, losses can fully offset other capital gains plus up to $3,000 of ordinary income per year, with unlimited carryforward.
As Long-Term Capital Gains: Long-term rates (0/15/20%) would apply only if held over 1 year, which might occur for some futures bets and perps.
Under Section 1256: A blended tax treatment with 60% taxed at long-term rates and 40% at short-term rates regardless of holding period. Losses are fully offset against capital gains and include a further deduction of up to $3,000 ordinary income. Additionally, losses can be carried back up to 3 years to offset previous 1256 gains.
Fall into Multiple Categories: Different contracts or positions may be taxed differently (gambling, capital gains, or Section 1256) based on specifics of each contract.
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News: Recapping Yesterday’s Prediction Market Hearing
Yesterday’s hearing in front of the House Committee on Agriculture’s Subcommittee on Commodity Markets, Digital Assets, and Rural Development went as expected. Which means it was full of sound and fury, signifying nothing.
The main argument from prediction market supporters/sympathizers was:
The CFTC already has clear statutory authority to regulate sports events contracts under the Commodity Exchange Act (CEA). Congress can amend the CEA if it wants to prohibit them.
The main argument from prediction market opponents was:
Sports event contracts function as sports betting in every practical sense. They allow people to wager on sports outcomes nationwide, including in states where sports betting has not been legalized, bypassing existing state and tribal regulatory frameworks.
Straight to the Point has explained this difference of opinion in previous newsletters, including here:
“Essentially, Kalshi’s argument is that there is a two-prong test, and the rules (even though they are in separate sections) cannot be read singularly, which would give the CFTC the final call on whether a contract violates the prohibited contracts in 40.11.(a). Essentially, rather than a blanket prohibition on the contracts, there is a procedural mechanism in 40.11.(c) that must also be considered, and that determines the legality of the contract.
“The counterargument is 40.11(a) is a categorical ban, while 40.11.(c) is a discretionary procedural safety valve for borderline cases.”
Where there was some level of agreement on the problem, but a disagreement on the solution:
The CFTC lacks the resources and expertise to properly oversee sports contracts. Critics point to this being a reason for the CFTC to leave that role to the states, while supporters argued that expanding its role without more funding/staff risks weak enforcement.
The CFTC’s ability to oversee nationwide sports betting is something Straight to the Point first broached in May 2025, and has been banging the drum about ever since.
If you’re interested in hearing precisely what was said (the same arguments that have been made in court, on the conference circuit, and in the press), here are some good recaps:
Rep. Johnson: Congress Should Not Be Silent in Sports Event Contract Debate [Robert Linnehan, Sports Betting Dime]
CFTC ‘extraordinary’ order to Kalshi highlights Congressional hearing [Tom Nightingale, SBC Americas]
Congress weighs its role as fight over sports betting prediction market oversight forges on [Sarah Wynn, TheBlock.co]
‘It Certainly Was a Flex’: House Panel Probes CFTC’s Authority Over Sports Prediction Markets As State Fights Escalate [Brett Smiley, InGame]
Quick Hitter: NCLGS Announces New Leadership
The National Council of Legislators from Gaming States (NCLGS) elected Georgia State Representative Al Williams as President at the Summer Meeting held in San Diego in July.
“I am deeply honored to serve as President of NCLGS and grateful for the confidence my fellow legislators have placed in me,” Williams said in a press release. “For more than two decades, I’ve worked to ensure that Georgia and states across the country approach gaming with integrity, responsibility, and a clear understanding of how these policies affect our communities. NCLGS is the only organization where lawmakers can come together openly and constructively to examine the fast‑changing gaming landscape.”
NCLGS also announced the following Officers who will serve alongside President Williams:
West Virginia State Senator Jason Barrett, 1st Vice President
Massachusetts State Representative Michael Finn, 2nd Vice President
Kansas State Representative Stephanie Sawyer Clayton, Secretary
Ohio State Senator Bill DeMora, Treasurer
The release also noted that, “NCLGS Founder, General Counsel and former Florida State Senator Steven Geller, and Immediate Past President, West Virginia Delegate Shawn Fluharty, will also serve as officers for the 2026-2027 annual period.”
Altruda Analyzes: Pennsylvania Online Casino Revenue June 2026
The Pennsylvania Gaming Control Board reported $242.5 million in adjusted gross internet casino revenue for June on Friday, capping a fiscal year that saw Keystone State gambling revenue surpass $7 billion.
Operators grossed $303.1 million in gross winnings prior to promotional deductions, making June the ninth straight month revenue topped $300 million. Taxable revenue was up 14.1% compared to June 2025 and topped $240 million for the fourth consecutive month.
The state’s cut for the month came to $72.1 million as Pennsylvania coffers saw an inflow of $867.5 million in receipts for the fiscal year. That was an increase of $150.7 million from Fiscal Year 2024-25, and the $443.4 million collected the first six months of 2026 is running $57.1 million ahead of last year’s pace.
Around the Watercooler
Social media conversations, rumors, and gossip.
Really good catch here by Jessica Welman, the Deputy Director of Fairer Gambling:
And yes, this is a correct reading, which means the bill to add facial recognition to prediction markets and sportsbooks would also essentially codify the point of view of Kalshi et al. on the CFTC’s oversight of sports contracts — on a case-by-case basis.
Stray Thoughts
As a coffee drinker, let me just say, Yes!
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